Wealth Planning

How tax loss harvesting can help in uncertain markets

  • If you sell investments at a loss and use them to offset gains, you may be able to reduce your tax bill.
  • Be mindful not to sell and then reacquire a substantially identical position too quickly, as this could constitute a "wash sale" and the tax rules may defer the loss or, in some cases, permanently disallow it. Instead, if you still want to own the position after you’ve sold, you may want to buy a similar but sufficiently different investment.
  • Speak with your tax advisor before making any moves.


If your investment portfolio has lost money during recent volatility in the markets, you may want to consider tax-loss harvesting. This is a strategy that involves selling investments that have appreciated and other investments that have depreciated in equivalent dollar amounts. These two sales, done in the same tax year, generally may offset each other so that your losses equal your gains and taxes owed cancel out.

Typically, an individual with more capital losses than gains in a tax year can also use up to $3,000 of capital losses to offset ordinary income. This means you could potentially "reduce" your taxable income and as a result the amount you owe in taxes.

Think about this as if you were at a sporting-goods store: you have $100 to spend, but you previously bought a tennis racquet for $50 that you don't want to keep. If you want to buy a golf club worth $150, you can return the $50 racquet and buy the club for a new $100. So, too, when you sell investments at a loss, you can use that loss to offset the gains you realize on other investments and net the two amounts on your taxes.

Watch out for wash sales

If you sell an investment and buy the same one again within 30 days before or after, that's generally known as a "wash sale." This type of transaction will disqualify your loss on the investment you sold, so you can't use it that year to offset gains. Note that it doesn't have to be the exact same investment; it could also be one that's "substantially identical." If you buy one that's too similar to the one you sold, the loss you incurred on the sale generally will be added to the tax basis of the replacement, deferring the loss until you ultimately sell the replacement.

What else falls into the category of "substantially identical" when selling a stock, for example? A call option typically would, or a number of other investments that are similar enough to the sold stock that the IRS considers to be substantially identical.  ETFs that track the same index and different bonds of the same issuer may also be considered substantially identical.  You must consider all the facts and circumstances in your particular case

Tips to stay in the market and avoid triggering a wash sale

There are two ways to maintain your position in an investment that you want to sell for a loss without triggering a wash sale.

  • "Double up" on it more than 30 days before you intend to sell it, or you can wait for at least 30 days after you sell it to repurchase it. Since doubling up heightens your exposure to the investment for the period before you sell it, you need to be sure that the increased concentration is appropriate for you.

  • Consult with your tax advisor about purchasing a substitute; common substitutes for single stock positions are stocks that trade similarly, such as two beverage companies that are direct competitors, or market proxies like ETFs that track the broader market.

Note: If any of the replacement investments appreciate in value and you sell them before you have held them for over a year, any gain will be short-term and taxed at ordinary income rates.

Everyone has a different financial and tax situation, so be sure to speak with your tax advisor before determining a tax strategy. 

 

 

 

 

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